P2P Guide

SAM HANDFIELD-JONES HEAD OF OCTOPUS CHOICE P2P lending and financial advisers aren’t the most obvious of bedfellows. For all the sector’s impressive growth, it’s fair to say that the advice community has remained largely sceptical. Advisers are naturally cautious of new developments. And with a wide range of more established investment options to choose from, recommending alternatives may not be high on the agenda. But in today’s challenging landscape, where inflation threatens to outstrip returns and market volatility rocks the confidence of even the most experienced investor, the need for alternatives may never have been greater. The Personal Investment Management & Financial Advice Association’s (Pimfa) private investor index series even has a 17.5% allocation to alternatives in its conservative investor benchmark – higher than the 10% allocated to government bonds (source: FT Adviser, September 2017). Against this backdrop, P2P lending could play an important role in meeting common investor problems – problems like generating attractive returns, creating an income, protecting from volatility or staying well diversified. And the market has continued to go from strength to strength. As section 1 of this guide highlights, UK P2P lending is expected to grow to £30 billion by 2025 – while, according to Yorkshire Bank’s (admittedly regretful) prediction, half a million new investors will try their hand at P2P as a result of the tax incentive and mainstream approval brought by the Innovative Finance ISA (IFISA). This influx makes the role of financial advice so important. In spite of its relative infancy, the P2P universe is already hugely diverse, spanning everything from unsecured credit card debt to secured residential property lending. It’s complex and confusing. With a vast array of products out there, each one offering a different risk-return profile, it’s important that investors know exactly what they’re getting into. And advisers have a powerful role to play. At Octopus, we work day-in, day-out with thousands of financial advisers – many of whom have asked for some additional support in getting to grips with this new, potentially attractive investment option. This guide aims to do just that. As well as providing insight into the market’s regulatory framework and exploring some of the key areas of difference between offerings, the guide will explore different client profiles for whom P2P could prove beneficial – and outline key considerations to bring to bear when performing due diligence of products and providers. We hope you find it useful. Opening Statement GUY TOLHURST MANAGING DIRECTOR, INTELLIGENT PARTNERSHIP Introduction This guide is designed as a practical resource providing technical information, true to life case studies and support focusing specifically on peer to peer lending (P2P). P2P is a promising and dynamic asset class that advisers can use in their client portfolios to secure: 1) Higher income than cash at a lower level of risk than equities 2) Diversification from mainstream markets However, P2P is not a homogenous asset class. There are different platforms, different operating models and different investment philosophies. There are also new terms to learn, new regulations for advisers to familiarise themselves with and new sources of data to investigate. So, for advisers who want to take advantage of P2P for their clients there is a lot to get to grips with! The intention of this guide is to help advisers do just that and we hope you find it interesting and useful. Learning Objectives After reading this guide, advisers will: • Have an understanding of the different types of lending available • Understand the pros and cons of typical P2P operating models • Have an overview of P2P regulations and permissions • Be aware of the business case for including P2P as an investment option, and where P2P may be useful in client portfolios • Have an understanding of the risks of P2P investing A guide like this is rarely the product of one organisation’s efforts: to ensure that it is up to date, comprehensive, accurate and captures all of the key issues requires an industry-wide initiative. We’ve had plenty of help producing this guide and would like to thank Gary Neild, Max Spurgeon and Graeme Stuart . Their input is invaluable, but needless to say any errors and omissions are ours. Most of all we would like to thank our sponsor Octopus Investments. It would not be possible to produce educational material like this without their generous support and contribution towards the production, printing and distribution of the guide. Acknowledgements